MaxedOutMama
Friday, July 10, 2009
A Second Failure In Chinese Bond Sales
Chinese exports dropped again (although slightly higher than May), but the big news is that a Chinese bond sale failed again:
The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.First, there are already stock and housing bubbles. It seems to me that everyone's still happily playing in those sandboxes.
Wednesday, July 08, 2009
Crude Inventories
See today's prior post on China and commodities below.
Here. The bottom line is that supplies of finished motor gasoline are up over last year, the supply of diesel moved up slightly, and the four week running average of imports is 775,000 barrels below last year's.
Crude inventories are 17.8% above last year's levels. Total stocks ex SPR are up 13.7% above last year's levels. YTD YoY comparisons of total product supplied for domestic use are down 5.9%. Motor gasoline demand for the last four weeks is now up 1.3% over last year. This supports the idea that some employment is popping up somewhere, perhaps in temp jobs. We'll see how this carries through the summer. The four week running average of distillate demand is now down 12.3% from last year.
From the narrative:
Here. The bottom line is that supplies of finished motor gasoline are up over last year, the supply of diesel moved up slightly, and the four week running average of imports is 775,000 barrels below last year's.
Crude inventories are 17.8% above last year's levels. Total stocks ex SPR are up 13.7% above last year's levels. YTD YoY comparisons of total product supplied for domestic use are down 5.9%. Motor gasoline demand for the last four weeks is now up 1.3% over last year. This supports the idea that some employment is popping up somewhere, perhaps in temp jobs. We'll see how this carries through the summer. The four week running average of distillate demand is now down 12.3% from last year.
From the narrative:
...U.S. crude oil inventories are above the upper boundary of the average range for this time of year. Total motor gasoline inventories increased by 1.9 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and gasoline blending components increased last week. Distillate fuel inventories increased by 3.7 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories increased by 1.3 million barrels last week and are above the upper limit of the average range. Total commercialThere is certainly no support for oil prices in this report. Gas prices have peaked and are dropping:
petroleum inventories increased by 5.1 million barrels last week, and are above the upper limit of the average range for this time of year.
China And Commodities
A Chinese debt auction fell short:
It's unlikely that exports will rebound halfway over the next year, so that leaves China with some technical problems. So far China has followed the course I expected - stocking up on commodities and stoking their internal fires. I am expecting them to start slowly pushing the yuan down in an attempt to support exports - they have already done most of what they can do in the way of cutting taxes on exports and so forth. I also expect their metals buying to be mostly lower.
Both China and India raises energy prices over the last few weeks. Chinese electricity production may be rebounding a bit, but there is still no pattern of YoY growth. Therefore I have trouble believing that the economy is growing substantially. After Zhao Bingren's comments, the issue appears now to be sensitive and perhaps somewhat censored. May US YoY electricity consumption was down 3.4%. May Chinese YoY electricity consumption was down 3.5%. Go figure.
We now enter an interesting period in which everyone has to try to keep in the middle of the monetary policy road while stimulating growth. It is going to be an exercise in inspired discretion at central banks, or perhaps aspirational recklessness at some. Only history will sort the efforts of the various central banks correctly.
Germany reported a hefty May increase in industrial production. This is unequivocally good news, but it must be tempered against the reality of very substantial overcapacity in the face of massive YoY drops. (Compare to US industrial production.) Japan, in contrast, is showing continued and in some aspects growing weakness, as in machinery orders and lower exports. The problem for Japan is that global and industrial overcapacity in industrial production is cutting industrial investment. It is not very likely that this trend will reverse itself any time soon. What happens if world industrial production resets itself about 8-10% lower over the next 12 months than in 2007?
It appears to me that we are close to the limits of monetary policy on a global scale. This discussion of dynamics in the Australian economy illustrates the world conundrum. Economies have a certain capacity to absorb debt. If one continues to crank up the money supply after that level has been reached, the result will be bubbles or inflation, both of which result in eventual contractions rather than sustainable growth. Our current global situation fails the dynamics of widespread inflation, because the incomes and/or the spending desire in the consumer segment is flagging. Thus, cranking up the money spigot too widely will tend to produce bubbles.
This afternoon the US consumer credit report comes out. The June Redbook retail report showed very constrained spending, and I don't see anything about US dynamics changing in the near future.
Against this, we now see renewed interest in commodity trading regulations, because there is no doubt that energy trading has been highly speculative over the last few years. I suspect that the focus on regulatory changes will have more of an effect on trading patterns than the hard statistics, but neither are favorable.
Heating oil contracts I've checked in the MidAltantic region seem to be ranging under $2.30, and spot prices for sizeable orders are as much as 20 cents lower. There's a considerable discrepancy between futures trading and end user sales prices.
I also noted with great interest that India is slapping a hefty import tax increase on gold and silver imports. Rural Indian consumer inflation is still running very high, which is also suggestive of a peak in credit formation.,
China failed to complete a 28 billion yuan ($4.1 billion) government bond sale for the first time, as the central bank withdrew cash from the financial system to reduce inflation pressures.The bottom line is that Chinese bank lending is still soaring, and it appears that a decent amount of the credit has gone into corresponding housing/stock bubbles. See this Forbes article on housing market measures, changes to mortgage lending, etc. The regulators are worried with reason. Requiring the higher downpayments on second homes is a thoughtful response. However, the nastiest thing about China's situation is that housing sales are highly correlated with stock gains. China has a high savings rate, but a poor banking system, so a great deal of savings goes directly into the stock market.
The Ministry of Finance sold 27.5 billion yuan of one-year notes at a yield of 1.06 percent, compared with 0.89 percent at the last auction of similar-maturity debt in May, according to Chinabond, the nation’s biggest debt-clearing house. Later, the People’s Bank of China it said will resume the sale of one-year bills tomorrow after an eight-month suspension.
It's unlikely that exports will rebound halfway over the next year, so that leaves China with some technical problems. So far China has followed the course I expected - stocking up on commodities and stoking their internal fires. I am expecting them to start slowly pushing the yuan down in an attempt to support exports - they have already done most of what they can do in the way of cutting taxes on exports and so forth. I also expect their metals buying to be mostly lower.
Both China and India raises energy prices over the last few weeks. Chinese electricity production may be rebounding a bit, but there is still no pattern of YoY growth. Therefore I have trouble believing that the economy is growing substantially. After Zhao Bingren's comments, the issue appears now to be sensitive and perhaps somewhat censored. May US YoY electricity consumption was down 3.4%. May Chinese YoY electricity consumption was down 3.5%. Go figure.
We now enter an interesting period in which everyone has to try to keep in the middle of the monetary policy road while stimulating growth. It is going to be an exercise in inspired discretion at central banks, or perhaps aspirational recklessness at some. Only history will sort the efforts of the various central banks correctly.
Germany reported a hefty May increase in industrial production. This is unequivocally good news, but it must be tempered against the reality of very substantial overcapacity in the face of massive YoY drops. (Compare to US industrial production.) Japan, in contrast, is showing continued and in some aspects growing weakness, as in machinery orders and lower exports. The problem for Japan is that global and industrial overcapacity in industrial production is cutting industrial investment. It is not very likely that this trend will reverse itself any time soon. What happens if world industrial production resets itself about 8-10% lower over the next 12 months than in 2007?
It appears to me that we are close to the limits of monetary policy on a global scale. This discussion of dynamics in the Australian economy illustrates the world conundrum. Economies have a certain capacity to absorb debt. If one continues to crank up the money supply after that level has been reached, the result will be bubbles or inflation, both of which result in eventual contractions rather than sustainable growth. Our current global situation fails the dynamics of widespread inflation, because the incomes and/or the spending desire in the consumer segment is flagging. Thus, cranking up the money spigot too widely will tend to produce bubbles.
This afternoon the US consumer credit report comes out. The June Redbook retail report showed very constrained spending, and I don't see anything about US dynamics changing in the near future.
Against this, we now see renewed interest in commodity trading regulations, because there is no doubt that energy trading has been highly speculative over the last few years. I suspect that the focus on regulatory changes will have more of an effect on trading patterns than the hard statistics, but neither are favorable.
Heating oil contracts I've checked in the MidAltantic region seem to be ranging under $2.30, and spot prices for sizeable orders are as much as 20 cents lower. There's a considerable discrepancy between futures trading and end user sales prices.
I also noted with great interest that India is slapping a hefty import tax increase on gold and silver imports. Rural Indian consumer inflation is still running very high, which is also suggestive of a peak in credit formation.,
Saturday, July 04, 2009
Independence Day 09!
Enjoy it.
Independence Day 1776 brought a democratic Constitution to Japan and Germany, so I think they ought to be celebrating too. (It's not that I didn't write that to be a bit obnoxious, but I also believe it. The meaning of Independence Day)
Sometimes I think some of our elected representatives need to be reminded of the meaning of day themselves, because when voters voting against you is considered terrorism, taxation without representation is the legislative goal! I'm considering mailing Karen Bass a teabag and a copy of the Declaration of Independence, as well as a sincere note thanking her for the laugh. For some reason teabags really upset some folks.
Ah, fireworks!
Independence Day 1776 brought a democratic Constitution to Japan and Germany, so I think they ought to be celebrating too. (It's not that I didn't write that to be a bit obnoxious, but I also believe it. The meaning of Independence Day)
Sometimes I think some of our elected representatives need to be reminded of the meaning of day themselves, because when voters voting against you is considered terrorism, taxation without representation is the legislative goal! I'm considering mailing Karen Bass a teabag and a copy of the Declaration of Independence, as well as a sincere note thanking her for the laugh. For some reason teabags really upset some folks.
Ah, fireworks!
Friday, July 03, 2009
Bike Messengers And Oil
The impact of unregulated futures exchanges can be intuitively seen in this story:
If everyone knows who is doing what, murky movements on the exchanges can be rebutted (for a profit) by more knowledgeable traders. Commodities exchanges overall reduce the price of commodities because they tend to forecast supply/demand changes and signal producers to adjust earlier. That is to the good. But really murky thin trading can cause rampant speculation. See this June 08 article discussing some of the problems with ICE.
In our current situation, in which returns on bonds are very low and currency risks are very high, commodity speculation is likely to be used as a hedge. That is okay only to the point at which has not yet divorced from the fundamentals of physical contracts.
The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (€7m) of losses for his company.No matter how stupid a big trading move, you can usually get a decent number of people to follow. If there are a couple of stories out there about oil going to $200 a barrel, the atmosphere is favorable. This time it wasn't, since a bunch of reports had just been issued suggesting otherwise (i.e. summer price peak of gasoline already here, high supplies, world demand not to reach previous peak for years).
...
Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event.
...
Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally.
If everyone knows who is doing what, murky movements on the exchanges can be rebutted (for a profit) by more knowledgeable traders. Commodities exchanges overall reduce the price of commodities because they tend to forecast supply/demand changes and signal producers to adjust earlier. That is to the good. But really murky thin trading can cause rampant speculation. See this June 08 article discussing some of the problems with ICE.
In our current situation, in which returns on bonds are very low and currency risks are very high, commodity speculation is likely to be used as a hedge. That is okay only to the point at which has not yet divorced from the fundamentals of physical contracts.
Wednesday, July 01, 2009
On Oil
I realize that the average person would prefer not to wade through the BP Statistical Review of World Energy. That is a pretty big pdf full of very nice tables but it is still only 48 pages.
However, if you are going to invest in energy you should read this thing each year, and spend some time with the related spreadsheet which can be downloaded from this page.
And there is one fact about oil that everyone should evaluate (see the tables on page 11/13). US oil consumption in 2008 dropped 6.4%. Total consumption rolled back to about 100,000 barrels per day LESS THAN 1999 consumption. Oil consumption in the US is still dropping in 2009. This is from this morning's report:
And since I know Oil Drum propagandized true believers won't bother to read this report before losing their asses, here is a short table by region of consumption:
Japan, which used 5.6% of the world consumption, dropped its consumption by 3.5%. The European Union increased its usage by 0.1%, but the emerging countries upped their usage by 3.1%.
It is a fallacy to believe that high oil prices won't suppress consumption. Countries which produce oil are using more, and countries which heavily subsidize oil for end users used more. But the subsidies are long term budget problems that will take care of themselves. How many more oil bonds can India print? China just increased its oil prices because it doesn't want to run its oil companies at a loss.
The theory that Chinese (with an average 2008 URBAN gross wage, as reported by Xinhua of less than 5K USD a year) were going to somehow pay $200 USD for a barrel of oil was always deranged. Clearly the oil analysts got into the structured income analysts' ganja supply. We recognize the fevered optimism and inability to assess risk. Rural wages in China were failing to keep pace with urban wages anyway.
In India, it is closer. The Indian power infrastructure is so poor that living in one of those apartment buildings in most cities pretty much requires a generator. But most of those people won't be running them when oil gets high - and Indian consumer usage was fueled in part by subsidies. I saw an article about Indians sleeping in their cars to get the AC overnight. Sections of India are having a heat wave because the monsoon is not moving in on schedule, which, btw, could become a serious situation for crops and India's economy.
Eventually, India will ramp up its electricity production and those generators will drop out. The per capita annual Indian wage rose to 37,490 rupees in 2008. In USD that is (let's be kind and just divide by 40) under 1K. Needless to say, there are very meaningful price constraints on usage. There are many people earning upwards of $100,000 USD, but there are an awful lot more living on extremely small incomes. India subsidizes basic energy such as kerosene for the really poor, and always will. But India's ability to subsidize those generators is failing.
India and China contain about 1/3rd of the world population. Their consumers can't on average hack these prices. Because China is so dependent upon exports, raising their incomes so they can consume at higher prices implies that their exports to the EU and the US would have to drop no more than 5%. HOWEVER, at oil prices of $100 a barrel, guess what? Consumption of oil and consumer products fall in the western world.
The EU can't hack it, the emerging countries can't hack it, Japan can't hack it, the US can't hack it, the world economy can't hack it. Not at $100 a barrel and not at $70 a barrel. Maybe we could stabilize at $55 or $60, but the production switch appears to be lower - between $45-$50. That implies that higher prices will push up production more quickly than consumption can increase at those prices.
Also, gold is a very interesting thing. It can go up for 20 years and fall for 20 years. But it is a lot easier to store gold and carry it around than to deal with oil. There is probably a glut of oil out there right now, and if there isn't there will be in just a month or two. US heating oil winter contracts wouldn't be offered at $2.29 unless the US refiners were pushing the stuff at low prices, which means they can't sell the glut for higher prices on the world market. You can store oil in a hole in the ground for a few months, but if you let it sit around exposed to the air for too long, algae grows in it. It's microbe munchie material.
So far US petroleum production is listed as being up 2.9% this year and gross imports are listed as being down 3.9%. Net imports have dropped 5.8%. This would imply that if all other countries maintained their usage at year ago levels, total world oil consumption would drop about 1.3% in 2009. (The domestic crude production stats include lease condensate, which is this sort of heavier compound of hydrocarbons that is a liquid instead of a gas and is a byproduct of natural gas production. It can be used in refining.)
Now personally, I doubt the rest of the world is maintaining their oil consumption. If you believe so, fine. But don't for a moment think that a two year swivel of over 2% favoring the supply side isn't going to have a lot to do with oil prices.
However, if you are going to invest in energy you should read this thing each year, and spend some time with the related spreadsheet which can be downloaded from this page.
And there is one fact about oil that everyone should evaluate (see the tables on page 11/13). US oil consumption in 2008 dropped 6.4%. Total consumption rolled back to about 100,000 barrels per day LESS THAN 1999 consumption. Oil consumption in the US is still dropping in 2009. This is from this morning's report:
Over the last four weeks, crude oil imports have averaged nearly 9.2 million barrels per day, 790 thousand barrels per day below the same four-week period last year.The YoY difference is holding. On a YTD basis, total domestic product supplied is down 6.1% compared to 2008. And there is PLENTY.
And since I know Oil Drum propagandized true believers won't bother to read this report before losing their asses, here is a short table by region of consumption:
NA (US, Canada & Mexico): Change for 2008: -5.4%; Share of World Consumption: 27.4%Total world usage dropped 0.6% last year (and production increased 0.4%). China ended up using 3.3% more than in 2007, which upped its share to 9.6%. India ended up using 4.8% more, which upped its share to 3.4%.
SA (South & Central America): Change for 2008: +3.4%; Share of World Consumption: 6.9%
Eurasia (Old USSR/Europe): Change for 2008: +0.6%; Share of World Consumption: 24.3%
Middle East (includes Iran): Change for 2008: +5.5%; Share of World Consumption: 7.8%
Africa (excluding ME ): Change for 2008: +3.8%; Share of World Consumption: 3.4%
Asia Pacific (Australia): Change for 2008: +0.2%; Share of World Consumption: 30.1%
Japan, which used 5.6% of the world consumption, dropped its consumption by 3.5%. The European Union increased its usage by 0.1%, but the emerging countries upped their usage by 3.1%.
It is a fallacy to believe that high oil prices won't suppress consumption. Countries which produce oil are using more, and countries which heavily subsidize oil for end users used more. But the subsidies are long term budget problems that will take care of themselves. How many more oil bonds can India print? China just increased its oil prices because it doesn't want to run its oil companies at a loss.
The theory that Chinese (with an average 2008 URBAN gross wage, as reported by Xinhua of less than 5K USD a year) were going to somehow pay $200 USD for a barrel of oil was always deranged. Clearly the oil analysts got into the structured income analysts' ganja supply. We recognize the fevered optimism and inability to assess risk. Rural wages in China were failing to keep pace with urban wages anyway.
In India, it is closer. The Indian power infrastructure is so poor that living in one of those apartment buildings in most cities pretty much requires a generator. But most of those people won't be running them when oil gets high - and Indian consumer usage was fueled in part by subsidies. I saw an article about Indians sleeping in their cars to get the AC overnight. Sections of India are having a heat wave because the monsoon is not moving in on schedule, which, btw, could become a serious situation for crops and India's economy.
Eventually, India will ramp up its electricity production and those generators will drop out. The per capita annual Indian wage rose to 37,490 rupees in 2008. In USD that is (let's be kind and just divide by 40) under 1K. Needless to say, there are very meaningful price constraints on usage. There are many people earning upwards of $100,000 USD, but there are an awful lot more living on extremely small incomes. India subsidizes basic energy such as kerosene for the really poor, and always will. But India's ability to subsidize those generators is failing.
India and China contain about 1/3rd of the world population. Their consumers can't on average hack these prices. Because China is so dependent upon exports, raising their incomes so they can consume at higher prices implies that their exports to the EU and the US would have to drop no more than 5%. HOWEVER, at oil prices of $100 a barrel, guess what? Consumption of oil and consumer products fall in the western world.
The EU can't hack it, the emerging countries can't hack it, Japan can't hack it, the US can't hack it, the world economy can't hack it. Not at $100 a barrel and not at $70 a barrel. Maybe we could stabilize at $55 or $60, but the production switch appears to be lower - between $45-$50. That implies that higher prices will push up production more quickly than consumption can increase at those prices.
Also, gold is a very interesting thing. It can go up for 20 years and fall for 20 years. But it is a lot easier to store gold and carry it around than to deal with oil. There is probably a glut of oil out there right now, and if there isn't there will be in just a month or two. US heating oil winter contracts wouldn't be offered at $2.29 unless the US refiners were pushing the stuff at low prices, which means they can't sell the glut for higher prices on the world market. You can store oil in a hole in the ground for a few months, but if you let it sit around exposed to the air for too long, algae grows in it. It's microbe munchie material.
So far US petroleum production is listed as being up 2.9% this year and gross imports are listed as being down 3.9%. Net imports have dropped 5.8%. This would imply that if all other countries maintained their usage at year ago levels, total world oil consumption would drop about 1.3% in 2009. (The domestic crude production stats include lease condensate, which is this sort of heavier compound of hydrocarbons that is a liquid instead of a gas and is a byproduct of natural gas production. It can be used in refining.)
Now personally, I doubt the rest of the world is maintaining their oil consumption. If you believe so, fine. But don't for a moment think that a two year swivel of over 2% favoring the supply side isn't going to have a lot to do with oil prices.
An Information Rich Environment
There's so much!
Retail sales - Redbook and ICSC. Summary: Bad consumer! Bad Consumer!. Consumer shouldn't pee on our same-store sales! That's a no-no! (Sound of newspaper thwapping consumer noses is heard in background.) In part the problem here is gas prices, weather may have played a part, but another big part is that in May and June some consumers were out shopping for cars at the dealers-in-line-to-be-executed, and were not at the retail stores. One generally doesn't do both unless one is a confirmed shopoholic, and recent trends in credit cards are cutting off the lifeblood of many confirmed shopoholics.
Still, it is not a pretty, optimistic, green-shooty type of thing. In May seniors got their feeble $250 stimulus checks and the last of the pension withholding cuts ran through. Because of recent movements in the dollar, most of that might have gone straight to medication and groceries. Over the last 10 days I noticed a feeble move toward hope in the staffing levels at grocery stores, which might indicate that they are eking out a bit more of a profit margin. I also noticed another huge roll into brandswitching and a shift toward economy-sensitive packaging of canned vegetables, etc.
Oil: There is nothing in this report to support current oil prices, and I would be amazed if that game didn't collapse soon. China is increasing energy prices, and US inventories show several interesting trends. Gasoline usage four-week continues to be up 0.9% YoY. This suggests to me that a bottom is forming in employment and may take hold over the next five months. Gas usage increases are probably related to the near stabilization seen in temporary jobs this spring according to the recent employment reports. However that trend in gasoline usage is not a support for current crude price levels, because YTD year over year usage is still down over 6% in the US, product inventories are high and generally increasing, four week YoY import levels are now down 790 thousand barrels a day, crude oil inventories are up 18.3% YoY, total stocks are up 13.4% YoY, distillate usage is down 9.4% YoY, and distillate inventories are still up 29.5% YoY. The diesel stocks are so high that there are bargains in heating oil out there. My brother in PA told me he got offered a winter contract at $2.29 - about half the cost of last year. One strategy for dealing with this is to move the heating oil out of storage into the consumer's/distributor's tanks.
Both diesel trends and gas trends are consistent with a tiny step up in the economy relative to the first part of the year, but that step up is at best levelling out. Because economic activity is so low still, that "step" is probably not the sign of a growing economy. Gasoline usage rises rapidly at the later stage of recessions as some people begin to get jobs (especially temp jobs), but have to travel much further to get them. We are not seeing that yet.
ADP Employment: While this improved from May's report, the total loss of jobs was 473,000. Combined with new graduates coming on the market, the employment expectation for the rest of the year looks grim. We could easily see unemployment rise to around 11% early next year. Jobs lost generally inflict more damage on banks, because most of the mortgage defaults, for example, are related to jobs lost rather than entrants into the market who can't get jobs. But unfortunately, the trend of financing college degrees with credit cards has risen over the last decade, and there will be more credit card defaults to come from these students over the next year. Small business job losses were reported at 177,000, which is off the peak but way too high to indicate a stabilizing economy. When that number drops to around 100,000 monthly my confidence level will rise.
Comparing the ADP report and ISM Manufacturing is an interesting exercise. According to ADP there was almost no change in job losses for manufacturing from the prior month. According to ISM, manufacturers are hiring. ISM at 44.8 shows a decent gain from the previous month. I think this report is over-optimistic. Shipments of metals and so forth have not increased enough according to rail data to support it. However this may be an accurate indicator of conditions in the next few months.
Value of Construction for May: This pinpoints one of the decisive drags on the US economy. If one were to listen to a certain GA senator, one would get the idea that all we had to do is to pay people to buy houses in order to enter a new and glorious world of joyous economic growth. But in fact, in terms of current construction value, residential construction is only a bit more than 1/3rd of all construction. Commercial and public construction provided a very nice cushion to the decline in residential construction over later 07 and all of 08. Thus (go to the last page of the linked report), value of total construction dropped only 6.8% from 07 to 08, whereas so far this year we have racked up an 11.7% decline NSA YTD from 08. How we managed to allocate 787 billion to get to a situation in which YoY NSA highway and street construction has dropped 1.9% (see page 3) is worthy of a Congressional investigation.
The knock-on effect from increases and decreases in construction have a disproportionate relationship to:
Speaking of residential construction, MBA purchase apps dropped 4.5% last week. Purchase apps have generally trended flat to down for the last few months when you adjust for the big fallouts in pendings. In the last few weeks a move to blame independent appraisals for the fallout in pending sales converting to sales has formed, which is entertainingly idiotic. See Calculated Risk for more on the MBA data and a nice graph. Pendings for May racked up a minimal SA month to month increase of 0.1%, and a 6.7% over last year. But comparisons of existing home sales have not shown the sales increase in the following months that would have been expected from pendings, and in part that is due to funding/appraisal problems. Given that appraisals remained generously in the hands of the loan officers or mortgage brokers last year, this should not surprise anyone. As fear has returned to the market, appraisals are due to seem disappointing. Actual mortgage lending remains amazingly loose to a degree that will generate a lot of foreclosures over the next 5 years on the last 12 months of home sales. We are creating losses that will just keep mounting.
There is, btw, no point at all in trying to support home prices. The reason is entirely due to the combination of the escalated home sales of the last few years on loans that were never going to be paid in combination with the demographics of the next generation of homebuyers. As you will see from the Census table at the end of my previous post, the upcoming cohort of 15-24 year olds is only about 1.6 million more than the 25-34 year old cohort. That cohort benefited from the extremely lax underwriting conditions to buy far more than their income-qualified share of homes. In addition the younger 20s are starting their working careers at a time of very severe recession, which will depress their earnings for years to come. In addition, the US is slated for very substantial tax hikes which will restrict this cohort's ability to accumulate downpayments. Effectively, the 15-24 year old cohort is going to be about 1/3rd lower in terms of buying homes than the previous cohort over the next decade.
Further, the marked rise in the buying of second homes among the older cohort will be a source of additional housing supply for over a decade. Higher taxation rates will actually afflict this cohort more than the younger cohort, and they will have to shed some expenses to live.
The last Daily Treasury Statement for June will be posted tonight. I am very curious as to how corporate income taxes do. It looks like CIT receipts are going to be about 1/3rd lower YoY. Federal Unemployment Tax receipts continue to be drastically off those of 2008. Before postulating recovery corporate income taxes must at least be entering a zone of stabilization.
And see this Bloomberg article about diesel supplies and manufacturing:
Retail sales - Redbook and ICSC. Summary: Bad consumer! Bad Consumer!. Consumer shouldn't pee on our same-store sales! That's a no-no! (Sound of newspaper thwapping consumer noses is heard in background.) In part the problem here is gas prices, weather may have played a part, but another big part is that in May and June some consumers were out shopping for cars at the dealers-in-line-to-be-executed, and were not at the retail stores. One generally doesn't do both unless one is a confirmed shopoholic, and recent trends in credit cards are cutting off the lifeblood of many confirmed shopoholics.
Still, it is not a pretty, optimistic, green-shooty type of thing. In May seniors got their feeble $250 stimulus checks and the last of the pension withholding cuts ran through. Because of recent movements in the dollar, most of that might have gone straight to medication and groceries. Over the last 10 days I noticed a feeble move toward hope in the staffing levels at grocery stores, which might indicate that they are eking out a bit more of a profit margin. I also noticed another huge roll into brandswitching and a shift toward economy-sensitive packaging of canned vegetables, etc.
Oil: There is nothing in this report to support current oil prices, and I would be amazed if that game didn't collapse soon. China is increasing energy prices, and US inventories show several interesting trends. Gasoline usage four-week continues to be up 0.9% YoY. This suggests to me that a bottom is forming in employment and may take hold over the next five months. Gas usage increases are probably related to the near stabilization seen in temporary jobs this spring according to the recent employment reports. However that trend in gasoline usage is not a support for current crude price levels, because YTD year over year usage is still down over 6% in the US, product inventories are high and generally increasing, four week YoY import levels are now down 790 thousand barrels a day, crude oil inventories are up 18.3% YoY, total stocks are up 13.4% YoY, distillate usage is down 9.4% YoY, and distillate inventories are still up 29.5% YoY. The diesel stocks are so high that there are bargains in heating oil out there. My brother in PA told me he got offered a winter contract at $2.29 - about half the cost of last year. One strategy for dealing with this is to move the heating oil out of storage into the consumer's/distributor's tanks.
Both diesel trends and gas trends are consistent with a tiny step up in the economy relative to the first part of the year, but that step up is at best levelling out. Because economic activity is so low still, that "step" is probably not the sign of a growing economy. Gasoline usage rises rapidly at the later stage of recessions as some people begin to get jobs (especially temp jobs), but have to travel much further to get them. We are not seeing that yet.
ADP Employment: While this improved from May's report, the total loss of jobs was 473,000. Combined with new graduates coming on the market, the employment expectation for the rest of the year looks grim. We could easily see unemployment rise to around 11% early next year. Jobs lost generally inflict more damage on banks, because most of the mortgage defaults, for example, are related to jobs lost rather than entrants into the market who can't get jobs. But unfortunately, the trend of financing college degrees with credit cards has risen over the last decade, and there will be more credit card defaults to come from these students over the next year. Small business job losses were reported at 177,000, which is off the peak but way too high to indicate a stabilizing economy. When that number drops to around 100,000 monthly my confidence level will rise.
Comparing the ADP report and ISM Manufacturing is an interesting exercise. According to ADP there was almost no change in job losses for manufacturing from the prior month. According to ISM, manufacturers are hiring. ISM at 44.8 shows a decent gain from the previous month. I think this report is over-optimistic. Shipments of metals and so forth have not increased enough according to rail data to support it. However this may be an accurate indicator of conditions in the next few months.
Value of Construction for May: This pinpoints one of the decisive drags on the US economy. If one were to listen to a certain GA senator, one would get the idea that all we had to do is to pay people to buy houses in order to enter a new and glorious world of joyous economic growth. But in fact, in terms of current construction value, residential construction is only a bit more than 1/3rd of all construction. Commercial and public construction provided a very nice cushion to the decline in residential construction over later 07 and all of 08. Thus (go to the last page of the linked report), value of total construction dropped only 6.8% from 07 to 08, whereas so far this year we have racked up an 11.7% decline NSA YTD from 08. How we managed to allocate 787 billion to get to a situation in which YoY NSA highway and street construction has dropped 1.9% (see page 3) is worthy of a Congressional investigation.
The knock-on effect from increases and decreases in construction have a disproportionate relationship to:
- material production (i.e. concrete, steel, crushed stone),
- male employment in the lower income/education brackets,
- truck and construction parts,
- tires,
- trucking,
- rail,
- monetary velocity
Speaking of residential construction, MBA purchase apps dropped 4.5% last week. Purchase apps have generally trended flat to down for the last few months when you adjust for the big fallouts in pendings. In the last few weeks a move to blame independent appraisals for the fallout in pending sales converting to sales has formed, which is entertainingly idiotic. See Calculated Risk for more on the MBA data and a nice graph. Pendings for May racked up a minimal SA month to month increase of 0.1%, and a 6.7% over last year. But comparisons of existing home sales have not shown the sales increase in the following months that would have been expected from pendings, and in part that is due to funding/appraisal problems. Given that appraisals remained generously in the hands of the loan officers or mortgage brokers last year, this should not surprise anyone. As fear has returned to the market, appraisals are due to seem disappointing. Actual mortgage lending remains amazingly loose to a degree that will generate a lot of foreclosures over the next 5 years on the last 12 months of home sales. We are creating losses that will just keep mounting.
There is, btw, no point at all in trying to support home prices. The reason is entirely due to the combination of the escalated home sales of the last few years on loans that were never going to be paid in combination with the demographics of the next generation of homebuyers. As you will see from the Census table at the end of my previous post, the upcoming cohort of 15-24 year olds is only about 1.6 million more than the 25-34 year old cohort. That cohort benefited from the extremely lax underwriting conditions to buy far more than their income-qualified share of homes. In addition the younger 20s are starting their working careers at a time of very severe recession, which will depress their earnings for years to come. In addition, the US is slated for very substantial tax hikes which will restrict this cohort's ability to accumulate downpayments. Effectively, the 15-24 year old cohort is going to be about 1/3rd lower in terms of buying homes than the previous cohort over the next decade.
Further, the marked rise in the buying of second homes among the older cohort will be a source of additional housing supply for over a decade. Higher taxation rates will actually afflict this cohort more than the younger cohort, and they will have to shed some expenses to live.
The last Daily Treasury Statement for June will be posted tonight. I am very curious as to how corporate income taxes do. It looks like CIT receipts are going to be about 1/3rd lower YoY. Federal Unemployment Tax receipts continue to be drastically off those of 2008. Before postulating recovery corporate income taxes must at least be entering a zone of stabilization.
And see this Bloomberg article about diesel supplies and manufacturing:
Supplies of diesel, the fuel that powers heavy trucks used to move goods across the U.S., rose to the highest in at least 16 years this month, as manufacturing inventories climbed, signaling a need for fewer deliveries.Also, see NACM's June report, which is generally consistent with a contracting economy that is close to finding a floor. The discussion of risks to this projected trend:
...
“Inventories are bloated,” said Tavio Headley, an economist with the American Trucking Associations in Arlington, Virginia. “Businesses are not taking many new deliveries, and that has a huge effect on tonnage volumes. The significant drop in tonnage volumes is also having a huge impact on domestic diesel demand.”
The data reinforces the sense that has been dominating most economic analysis for the past few months. “The discussion started to shift from how much worse the economy would become to how fast it would recover,” said Kuehl. “The balance now is delicate, as growth that is too sharp will result in a serious inflation jump, while growth that is too slow will keep the economy in the doldrums too long. The fact that the CMI is stable for the last three months is a good sign as far as inflation threats are concerned. If there was an imminent danger of too much liquidity, it would be reflected in a sharp rise in the index. This has not manifested itself thus far.”Many service businesses have state contracts, and what used to be a stable, at least bread-and-butter type of thing is now a counterparty risk. To convey the extent of the problem, a one-month block in payments (or payments by IOU) from California would cut off at least 10% of the cash flow to some significant businesses. The businesses could probably tolerate one month, but two would push many to seek additional credit, and three would cause loan defaults. There are slow payment problems with multiple state and local governments.
The growth areas are showing some truly positive signs. The biggest gains came from the favorable factors. Sales and new credit applications are both up dramatically, there has been a significant increase in credit granted and dollar collections are up. In unfavorable factors, there were fewer bankruptcies and fewer disputes. These are all signs of business returning to some semblance of normal activity. The businesses that have survived the recession are looking to return to this normalcy and are paying their bills, buying product and gaining access to capital again.
Now, the primary questions are whether this trend accelerates and what will be the source of the threats. The most serious concern now is with state governments. The sharp drops in revenue have thrust most of the states into a budget crisis and they have reacted with program cuts. These programs and projects provided a great deal of private business expansion and there will be a reaction to this decline. Some of this is showing up among survey respondents who have noted that governments are becoming less reliable in paying their bills. This is perhaps the most significant shoe to fall in recent months and solving the problem will take longer than dealing
with private sector issues.
Tuesday, June 30, 2009
Setting Aside The Insanity And Returning To The Economy
It's June. By now, I believe one thing is clear - that there is not enough global economic momentum to emerge into strong growth any time soon.
Here's why in the US, consumer confidence fell heftily in June:
Anyone who has bought gas recently probably can understand why. Current incomes are falling and prices are beginning to rise as unemployment continues to rise. The number of people who know people who are intractably unemployed must be increasing rapidly, and state and local government employees are also now feeling less secure. Thus we have a very broad-based and widely diffused set of economic difficulties. Both mean and median durations of unemployment have reached remarkable levels. Here is median:
There is really no question that demographics have a lot to do with this, but because demograpics do, don't expect to see incomes rise sharply as minor growth cycles begin to spurt off the bottom of this recession. Note that the employment/population ratio was falling before the recession started:
It's not coming back. It peaked in the 90s. It will bounce around a little bit, but employment is tight and retirements will mount. Further, a lot more people are working part time and will continue to do so. Once they can get on Medicare/Social Security, able-bodied seniors will try to work part-time to maximize their early retirement incomes. Further, a lot of government employees will retire at their first possible moment, because many of them realize that retirement benefits are going to be adjusted down, and that is least likely to happen to those who are already receiving benefits.
Chicago PMI:
This survey confirms the general manufacturing trend - a slow further decline. It is clear that we are getting to the end of the decline, but by the time we do, we will be at such a low level that it appears the economy will be tremendously weak and will have little further forward impetus. In addition, rising fuel and commodity prices are beginning to send some prices up again. A manufacturing rebound is not going to lead the US out of this recession this year.
So, is there any other constituency of the economy that could lead us out? Small businesses. There it is hard to get a feel for things. Some small businesses were staggering along, and have now given up. Some are clearly doing better as competition decreases. But when I look at the details of small business survey's such as Tatum's, I see that the underlying trend in May was still declining expenditures and contracting order backlogs, and most of the improvement in these indexes was due to future expectations. I expect some of these to take another step down in the next two months.
Go to page four of the full Tatum survey, and look at the progression there. The June index was so close to that of last year's that it doesn't offer much hope unless consumers start to spend heavily again. Note also when the collapse in the small business index began - way before the financial crisis of last fall. This recession wasn't spawned by Lehman's demise, and it wasn't spawned by credit difficulties. Both of those factors have deepened the impact considerably, but the real cause of this thing was structural, and unfortunately the structural factors have not yet been worked off.
You might also find this discussion of the NFIB small business survey interesting. Until small business profits improve, we are not going to see the hiring and spending. Note that tighter credit is becoming more of a problem for small businesses now. Again, the steep fall in this index began at the end of 2007. Go to page 8 and notice that profits seem to have stabilized at a very low level. Then go to page 9 and look at the graph for profit expectations/versus current profits. Note that small business profit expectations usually rise well ahead of actual improvement. In small banking, this is a well-known factor! In 92, for example, profit expectations shot way up but actual profits really didn't improve for 9 months more.
One of the reason for the profit expectations report lag is that small businesses often respond to an increase in sales and revenue by buying stuff, which reduces profits. The alternative is to pay more taxes to larcenous federal and state entities, which makes them feel sick. There is no one who is an easier sale than a small business proprietor or principal who's just gotten the bad news from his accountant. Because many small business owners are on the calendar tax year, one might expect that we would see a big uptick in sales to such persons at the end of the year - anything and everything that they could take off their business taxes.
However in this recession I don't expect that to happen in the normal way. There are two reasons. The first is that a number of small business owners are older, and are worried about staggering through to their retirement. They are conserving cash. The second is that I believe that commercial credit conditions are getting significantly worse and that small business owners will have trouble borrowing to buy. Whatever money they can get will be put into inventory rather than capital goods. This will suppress general economic conditions for the rest of this year. Moreover, small businesses will not improve inventory until sales move up significantly, and sales were still at their recession low in May.
Consumer-oriented small businesses seem to be folding up shop at a high rate, or staggering along waiting for the rains to come and water the fields of consumer commerce. I suspect they will not see another really good crop out of those fields for some years to come.
Consumer incomes are falling which leads to this problem:
If interest rates increase, as they should in a recovery, there is the problem that the DSR ratio may grow worse instead of better, because household credit market debt is at remarkably high levels:
In a few years, refinancing your home to cover auto or CC debt is going to be a losing proposition, and those
HELOC lines are going to turn into a big, big ouchie. What's so remarkable about this is the age of the US population. See 2008 ACS data on US population age.
About 82 million are 19 and under, and should not have much in the way of debt. Approximately 70 million are 55 and older. That, in total, is half the US population. Traditionally, the 55 and older group would be expected to have very little consumer debt and to be in the last stages of paying down their mortgages. The goal for the prior group of retirees was to clear their mortgages before 60 and to build up their nest eggs. At this point, they expected to pay for new cars with cash plus trade-in value, etc.
Obviously, the traditional metrics don't hold. The remarkable rise in household debt also occurred among a group of people who are now poorly prepared for retirement. To get further insight into the matter, we turn to the 2007 Federal Survey of Consumer Finances. I will go further into that in the next post.
It's worth noting that our demographics have a lot to do with expected future consumer spending and also with expected medical spending. An aging population is going to spend more on medical care regardless of any other trends, and pretending that it won't is stupid.
2008 Age Brackets:
Update: See Rebecca's post on world demographics. I'm not going to get to ROW for a bit yet with this series, but yes, there is a global problem.
Here's why in the US, consumer confidence fell heftily in June:
The Index now stands at 49.3 (1985=100), down from 54.8 in May. The Present Situation Index decreased to 24.8 from 29.7. The Expectations Index declined to 65.5 from 71.5 in May.This really should not be that much of a surprise, because what confidence there was among consumers in these surveys was concentrated on the future. As talk of green shoots fizzles, that fades out, and actual conditions begin to weigh on people's minds.
Anyone who has bought gas recently probably can understand why. Current incomes are falling and prices are beginning to rise as unemployment continues to rise. The number of people who know people who are intractably unemployed must be increasing rapidly, and state and local government employees are also now feeling less secure. Thus we have a very broad-based and widely diffused set of economic difficulties. Both mean and median durations of unemployment have reached remarkable levels. Here is median:
There is really no question that demographics have a lot to do with this, but because demograpics do, don't expect to see incomes rise sharply as minor growth cycles begin to spurt off the bottom of this recession. Note that the employment/population ratio was falling before the recession started:
It's not coming back. It peaked in the 90s. It will bounce around a little bit, but employment is tight and retirements will mount. Further, a lot more people are working part time and will continue to do so. Once they can get on Medicare/Social Security, able-bodied seniors will try to work part-time to maximize their early retirement incomes. Further, a lot of government employees will retire at their first possible moment, because many of them realize that retirement benefits are going to be adjusted down, and that is least likely to happen to those who are already receiving benefits.
Chicago PMI:
This survey confirms the general manufacturing trend - a slow further decline. It is clear that we are getting to the end of the decline, but by the time we do, we will be at such a low level that it appears the economy will be tremendously weak and will have little further forward impetus. In addition, rising fuel and commodity prices are beginning to send some prices up again. A manufacturing rebound is not going to lead the US out of this recession this year.
So, is there any other constituency of the economy that could lead us out? Small businesses. There it is hard to get a feel for things. Some small businesses were staggering along, and have now given up. Some are clearly doing better as competition decreases. But when I look at the details of small business survey's such as Tatum's, I see that the underlying trend in May was still declining expenditures and contracting order backlogs, and most of the improvement in these indexes was due to future expectations. I expect some of these to take another step down in the next two months.
Go to page four of the full Tatum survey, and look at the progression there. The June index was so close to that of last year's that it doesn't offer much hope unless consumers start to spend heavily again. Note also when the collapse in the small business index began - way before the financial crisis of last fall. This recession wasn't spawned by Lehman's demise, and it wasn't spawned by credit difficulties. Both of those factors have deepened the impact considerably, but the real cause of this thing was structural, and unfortunately the structural factors have not yet been worked off.
You might also find this discussion of the NFIB small business survey interesting. Until small business profits improve, we are not going to see the hiring and spending. Note that tighter credit is becoming more of a problem for small businesses now. Again, the steep fall in this index began at the end of 2007. Go to page 8 and notice that profits seem to have stabilized at a very low level. Then go to page 9 and look at the graph for profit expectations/versus current profits. Note that small business profit expectations usually rise well ahead of actual improvement. In small banking, this is a well-known factor! In 92, for example, profit expectations shot way up but actual profits really didn't improve for 9 months more.
One of the reason for the profit expectations report lag is that small businesses often respond to an increase in sales and revenue by buying stuff, which reduces profits. The alternative is to pay more taxes to larcenous federal and state entities, which makes them feel sick. There is no one who is an easier sale than a small business proprietor or principal who's just gotten the bad news from his accountant. Because many small business owners are on the calendar tax year, one might expect that we would see a big uptick in sales to such persons at the end of the year - anything and everything that they could take off their business taxes.
However in this recession I don't expect that to happen in the normal way. There are two reasons. The first is that a number of small business owners are older, and are worried about staggering through to their retirement. They are conserving cash. The second is that I believe that commercial credit conditions are getting significantly worse and that small business owners will have trouble borrowing to buy. Whatever money they can get will be put into inventory rather than capital goods. This will suppress general economic conditions for the rest of this year. Moreover, small businesses will not improve inventory until sales move up significantly, and sales were still at their recession low in May.
Consumer-oriented small businesses seem to be folding up shop at a high rate, or staggering along waiting for the rains to come and water the fields of consumer commerce. I suspect they will not see another really good crop out of those fields for some years to come.
Consumer incomes are falling which leads to this problem:
If interest rates increase, as they should in a recovery, there is the problem that the DSR ratio may grow worse instead of better, because household credit market debt is at remarkably high levels:
In a few years, refinancing your home to cover auto or CC debt is going to be a losing proposition, and those
HELOC lines are going to turn into a big, big ouchie. What's so remarkable about this is the age of the US population. See 2008 ACS data on US population age.
About 82 million are 19 and under, and should not have much in the way of debt. Approximately 70 million are 55 and older. That, in total, is half the US population. Traditionally, the 55 and older group would be expected to have very little consumer debt and to be in the last stages of paying down their mortgages. The goal for the prior group of retirees was to clear their mortgages before 60 and to build up their nest eggs. At this point, they expected to pay for new cars with cash plus trade-in value, etc.
Obviously, the traditional metrics don't hold. The remarkable rise in household debt also occurred among a group of people who are now poorly prepared for retirement. To get further insight into the matter, we turn to the 2007 Federal Survey of Consumer Finances. I will go further into that in the next post.
It's worth noting that our demographics have a lot to do with expected future consumer spending and also with expected medical spending. An aging population is going to spend more on medical care regardless of any other trends, and pretending that it won't is stupid.
2008 Age Brackets:
Under 5 years | 21,005,852 |
5 to 9 years | 20,065,249 |
10 to 14 years | 20,054,627 |
15 to 19 years | 21,514,358 |
20 to 24 years | 21,058,981 |
25 to 34 years | 40,931,565 |
35 to 44 years | 42,501,130 |
45 to 54 years | 44,372,065 |
55 to 59 years | 18,583,445 |
60 to 64 years | 15,102,736 |
65 to 74 years | 20,122,941 |
75 to 84 years | 13,025,007 |
85 years and over | 5,721,768 |
Update: See Rebecca's post on world demographics. I'm not going to get to ROW for a bit yet with this series, but yes, there is a global problem.
Friday, June 26, 2009
So, What's Going To Replace The Democratic Party?
I watched some of the debate on the Waxman-Malarkey bill today before Gaia got mad and started throwing huge thunderbolts, causing me to unplug everything and seek cover.
While I was un-carbon-producing (except for my breathing), it was passed. See David's Chicago-Boyz post.
I don't think the average person realizes that much of our current power plant dates from decades ago, that nuclear plants are going to going off line in about a decade due to age, and that we are apparently signing on to something that will raise the basic cost of living in a very substantial way, without actually having any alternatives.
We are at the point when this will come home quite quickly. The current bill has a ridiculous goal of cutting US per capita carbon dioxide emissions back to the 1700s. Needless to say, that will never come to pass. And most of the current bill's provisions are backloaded to later dates, but even the renewable energy mandates will raise fuel costs significantly within 5-6 years.
At some point, the peasants will revolt. It is almost as if this bill was a conspiracy of California Democrats who feel the need to bankrupt the rest of this country so that California will have an equal chance at funding, or something like that.
Volokh's Jim Lindgren has written several very good posts on this bill - this one, from months ago, reviews the ridiculous goal of the bill. This post from today reviews the central problem related to trade.
It's the inane nature of this bill that astounds me. We just cannot do it. Growing the food necessary to feed even our own population would emit more carbon than the final goals in the bill, even if every household in the USA was burning candles for light and had returned to the lifestyle that Paul Ehrlich used to recommend.
Okay, so in pursuit of a goal that's nonsensical, for a problem that is international and that will not be addressed internationally (India and China, for example, are refusing to starve their people to death), we adopt legislation that either sets up an iron wall of tariffs or drives half the nation into poverty in about 15 years. This is the most bizarre thing I have ever seen in my lifetime.
Let's hope it can be stopped in the Senate. Even if it is, our nation has lost something here, and that something is the principal legislative body's grasp on reality. It is as if the House of Representatives suddenly passed a vote to reduce gravity by 10 percent in order to lessen the costs of obesity to putatively cut Medicare costs in the future. Truly amazing.
I strongly recommend reviewing the figures in this old WSJ piece on the goal and then at least look at the abstract on crop emissions. The full article will cost you ten bucks.
I haven't, btw, reviewed the revised version. But some earlier work I did during the election suggested that anything expensive enough to reduce US carbon emissions by 10% would also cut GDP by about 12% (rolling time frame 3 years after initiative introduction).
I'm completely stunned.
While I was un-carbon-producing (except for my breathing), it was passed. See David's Chicago-Boyz post.
I don't think the average person realizes that much of our current power plant dates from decades ago, that nuclear plants are going to going off line in about a decade due to age, and that we are apparently signing on to something that will raise the basic cost of living in a very substantial way, without actually having any alternatives.
We are at the point when this will come home quite quickly. The current bill has a ridiculous goal of cutting US per capita carbon dioxide emissions back to the 1700s. Needless to say, that will never come to pass. And most of the current bill's provisions are backloaded to later dates, but even the renewable energy mandates will raise fuel costs significantly within 5-6 years.
At some point, the peasants will revolt. It is almost as if this bill was a conspiracy of California Democrats who feel the need to bankrupt the rest of this country so that California will have an equal chance at funding, or something like that.
Volokh's Jim Lindgren has written several very good posts on this bill - this one, from months ago, reviews the ridiculous goal of the bill. This post from today reviews the central problem related to trade.
It's the inane nature of this bill that astounds me. We just cannot do it. Growing the food necessary to feed even our own population would emit more carbon than the final goals in the bill, even if every household in the USA was burning candles for light and had returned to the lifestyle that Paul Ehrlich used to recommend.
Okay, so in pursuit of a goal that's nonsensical, for a problem that is international and that will not be addressed internationally (India and China, for example, are refusing to starve their people to death), we adopt legislation that either sets up an iron wall of tariffs or drives half the nation into poverty in about 15 years. This is the most bizarre thing I have ever seen in my lifetime.
Let's hope it can be stopped in the Senate. Even if it is, our nation has lost something here, and that something is the principal legislative body's grasp on reality. It is as if the House of Representatives suddenly passed a vote to reduce gravity by 10 percent in order to lessen the costs of obesity to putatively cut Medicare costs in the future. Truly amazing.
I strongly recommend reviewing the figures in this old WSJ piece on the goal and then at least look at the abstract on crop emissions. The full article will cost you ten bucks.
I haven't, btw, reviewed the revised version. But some earlier work I did during the election suggested that anything expensive enough to reduce US carbon emissions by 10% would also cut GDP by about 12% (rolling time frame 3 years after initiative introduction).
I'm completely stunned.
Thursday, June 25, 2009
The Titanic Sails
Weekly claims came out higher - 627,000 SA this week, and last week's was revised to 612,000. That boosted the 4 week running average.
However, this is not significant, just as the earlier drops weren't significant. One factor about the June claims reports are the seasonal adjustments, and this year the seasonal adjustments were likely to be distorted lower earlier and higher later. The reason is that there is a big pulse of claims from closing school systems, and last winter was quite a brutal one in many areas. The probability is that calendars were adjusted later to account for snow and adverse weather days. Not that claims in the 600,000 range are ever a sign of green shoots!
Q1 final GDP was released today and it came out as -5.5%. Not that this is really final - GDP gets revised for quite some time. For the US, two consecutive quarters of annualized drops in excess of 5% are really shocking. Notable factors in Q1 were the drops in real government spending (-4.5% federal and -2.2% state), drops in real gross domestic purchases (-7.5% compared to -5.9% in the fourth quarter), and real gross GNP of -5.6% in Q1 and Q4. GNP includes net receipts from outside the US, whereas GDP does not. However GNP has a lot to do with whether corporations can spend more and corporate income tax receipts. So this is not a favorable factor and it highlights concerns over the future.
I would like to call your attention to Table 8 in the link above. This shows the rolling 4 quarter percent change (change over the past year) for the various categories. The rolling four-quarter change for GDP is now -2.5%. Far more frightening is the same figure for gross private domestic investment, which in Q1 was -23.6%, and has now been falling since fourth quarter 2006! Gross private domestic investment is the fundamental driver of this economy and just about every other economy, and at no time can one ever rack up a such a string of GPDI decreases in an economy without generating a pretty intense recession.
That is the first thing on which every realistic economist must stay concentrated. Talk about a credit crisis does not address the fundamental economic operator, and dumping a lot of stimulus money into the economy will not overcome a recession produced by collapsing GPDI unless it boosts domestic investment - which our stimulus package does not.
Since we aren't bothering to boost domestic investment much, improvement will wait upon a stabilization and then increase of corporate profits. And not only that - the stabilization and increase of corporate profits must come from non-financial companies, because financial companies have a huge line of waiting losses queued for the next couple of years.
If you refer to Table 12, you'll see that domestic industries racked up a 76.2 billion dollar fall in profits in 07, and a 328.8 fall in profits in 08. However, in Q1 profits from domestic industries increased by 120.3 billion. That would bring a large smile to our faces, except that in fact 118.8 billion of that came from financials, and only 1.6 billion originated in other industries.
The problem with the financial profits is that at least half of them are fake, having been generated by highly creative accounting and overly low loss reserves, and about a quarter of the rest were generated by the very low interest rates and rolling of loans. Thus, do not expect financial profits to carry the economy forward in the coming year. The financials are still a black hole sucking up US income. In fact, this is the US money hole discussed by an eminent panel of scholars rounded up by the Onion (video).
The stabilization of non-financial profits in Q1 is favorable. Much of it was generated by the pronounced drop in producer prices. Indeed, the net of all other industries except for utilities was negative - utilities racked up a 12.7 billion increase on mostly lower input costs. Thus we have a picture of a first quarter economy which was struggling to readapt and reach a point of stability. Profit declines in wholesale trade were -44.4 billion, for example. Profit in retail increased by 13.3 billion. Manufacturing came in about at 0 for durables, but turned in non-durable declines of 16.2 billion, which were all attributable to the declines of oil and coal. ROW turned in a decline of 16.6 billion.
In 2006 the ratio of financial/non-financial profits was 49%. In 2007, it was 49%. In 2008, 38%. In Q1 09, just under 34%. Since the maximum sustainable US ratio of financial/nonfinancial profits is probably in the 25-30% range going forward, we have further to travel. If we do not plan on being very poor, obviously we need to expand non-financial profits.
And that raises a dire question about the Waxman energy plan and the Obama administration's energy policy. If we raise energy costs, we must further constrain non-financial profits in an environment in which individual incomes are dropping.
Thus, the major questions facing the US economy are based on government policy initiatives, which is rarely a positive factor in forecasting. Barring massive investment in nuclear energy and further hydropower projects (the scope for which is limited in the US), there is no way to obtain "green" energy that is not considerably more expensive than current energy sources. This will cut US disposable personal and business incomes significantly, and strike another blow at domestic manufacturing. There is no way around it. All countries which have heavily invested in "green" power have cut jobs, raised consumer energy costs, and impaired their own economies. We will not be any different.
Further, any long-term shift to electric vehicles would certainly rely on steady, reliable and cheap generation of electricity. I experienced the oddest sensation of sheer incredulity when watching the Obama press conference this week. Economically, the Obama administration's plan amounts to finding an iceberg and running the ship of state into it, apparently on the theory that we are unsinkable.
Consider this: any realistic plan to substantially expand US medical insurance coverage will involve very substantial tax hikes on US workers. Private insurance isn't even the main factor - to expand Medicare to all Americans would involve an additional wage tax of about 14.5%, and that would have to rise as the population aged.
To combine substantial tax hikes on workers with an energy policy which will substantially increase energy costs to workers, raise the price of goods, and diminish US profits is to theorize that we are going to cut real US consumer disposable incomes on the order of 20%. Needless to say, the havoc produced in retail and housing and consumer debt would be immense. US citizens may believe that things can't get worse, but things can!
One bright note: China would be even worse hit than the US. Not only would their dollar holdings devalue, but US living standards will plummet, which means that China's exports to the US would continue to plummet.
However, this is not significant, just as the earlier drops weren't significant. One factor about the June claims reports are the seasonal adjustments, and this year the seasonal adjustments were likely to be distorted lower earlier and higher later. The reason is that there is a big pulse of claims from closing school systems, and last winter was quite a brutal one in many areas. The probability is that calendars were adjusted later to account for snow and adverse weather days. Not that claims in the 600,000 range are ever a sign of green shoots!
Q1 final GDP was released today and it came out as -5.5%. Not that this is really final - GDP gets revised for quite some time. For the US, two consecutive quarters of annualized drops in excess of 5% are really shocking. Notable factors in Q1 were the drops in real government spending (-4.5% federal and -2.2% state), drops in real gross domestic purchases (-7.5% compared to -5.9% in the fourth quarter), and real gross GNP of -5.6% in Q1 and Q4. GNP includes net receipts from outside the US, whereas GDP does not. However GNP has a lot to do with whether corporations can spend more and corporate income tax receipts. So this is not a favorable factor and it highlights concerns over the future.
I would like to call your attention to Table 8 in the link above. This shows the rolling 4 quarter percent change (change over the past year) for the various categories. The rolling four-quarter change for GDP is now -2.5%. Far more frightening is the same figure for gross private domestic investment, which in Q1 was -23.6%, and has now been falling since fourth quarter 2006! Gross private domestic investment is the fundamental driver of this economy and just about every other economy, and at no time can one ever rack up a such a string of GPDI decreases in an economy without generating a pretty intense recession.
That is the first thing on which every realistic economist must stay concentrated. Talk about a credit crisis does not address the fundamental economic operator, and dumping a lot of stimulus money into the economy will not overcome a recession produced by collapsing GPDI unless it boosts domestic investment - which our stimulus package does not.
Since we aren't bothering to boost domestic investment much, improvement will wait upon a stabilization and then increase of corporate profits. And not only that - the stabilization and increase of corporate profits must come from non-financial companies, because financial companies have a huge line of waiting losses queued for the next couple of years.
If you refer to Table 12, you'll see that domestic industries racked up a 76.2 billion dollar fall in profits in 07, and a 328.8 fall in profits in 08. However, in Q1 profits from domestic industries increased by 120.3 billion. That would bring a large smile to our faces, except that in fact 118.8 billion of that came from financials, and only 1.6 billion originated in other industries.
The problem with the financial profits is that at least half of them are fake, having been generated by highly creative accounting and overly low loss reserves, and about a quarter of the rest were generated by the very low interest rates and rolling of loans. Thus, do not expect financial profits to carry the economy forward in the coming year. The financials are still a black hole sucking up US income. In fact, this is the US money hole discussed by an eminent panel of scholars rounded up by the Onion (video).
The stabilization of non-financial profits in Q1 is favorable. Much of it was generated by the pronounced drop in producer prices. Indeed, the net of all other industries except for utilities was negative - utilities racked up a 12.7 billion increase on mostly lower input costs. Thus we have a picture of a first quarter economy which was struggling to readapt and reach a point of stability. Profit declines in wholesale trade were -44.4 billion, for example. Profit in retail increased by 13.3 billion. Manufacturing came in about at 0 for durables, but turned in non-durable declines of 16.2 billion, which were all attributable to the declines of oil and coal. ROW turned in a decline of 16.6 billion.
In 2006 the ratio of financial/non-financial profits was 49%. In 2007, it was 49%. In 2008, 38%. In Q1 09, just under 34%. Since the maximum sustainable US ratio of financial/nonfinancial profits is probably in the 25-30% range going forward, we have further to travel. If we do not plan on being very poor, obviously we need to expand non-financial profits.
And that raises a dire question about the Waxman energy plan and the Obama administration's energy policy. If we raise energy costs, we must further constrain non-financial profits in an environment in which individual incomes are dropping.
Thus, the major questions facing the US economy are based on government policy initiatives, which is rarely a positive factor in forecasting. Barring massive investment in nuclear energy and further hydropower projects (the scope for which is limited in the US), there is no way to obtain "green" energy that is not considerably more expensive than current energy sources. This will cut US disposable personal and business incomes significantly, and strike another blow at domestic manufacturing. There is no way around it. All countries which have heavily invested in "green" power have cut jobs, raised consumer energy costs, and impaired their own economies. We will not be any different.
Further, any long-term shift to electric vehicles would certainly rely on steady, reliable and cheap generation of electricity. I experienced the oddest sensation of sheer incredulity when watching the Obama press conference this week. Economically, the Obama administration's plan amounts to finding an iceberg and running the ship of state into it, apparently on the theory that we are unsinkable.
Consider this: any realistic plan to substantially expand US medical insurance coverage will involve very substantial tax hikes on US workers. Private insurance isn't even the main factor - to expand Medicare to all Americans would involve an additional wage tax of about 14.5%, and that would have to rise as the population aged.
To combine substantial tax hikes on workers with an energy policy which will substantially increase energy costs to workers, raise the price of goods, and diminish US profits is to theorize that we are going to cut real US consumer disposable incomes on the order of 20%. Needless to say, the havoc produced in retail and housing and consumer debt would be immense. US citizens may believe that things can't get worse, but things can!
One bright note: China would be even worse hit than the US. Not only would their dollar holdings devalue, but US living standards will plummet, which means that China's exports to the US would continue to plummet.
Tuesday, June 23, 2009
Just One Small Discrepancy
Earlier I expressed skepticism as to the establishment figure for May's employment report, noting that it did not match the household survey at all.
This article discussing BLS's mass layoffs report for May lends additional force to my skepticism:
When times are tight, one of the main strategies is to allow attrition to work - it is certainly cheaper. There are also a huge number of total US workers in small companies that will never show up in a mass layoff report because there are too few total workers. I strongly suspect that the Births in the Birth/Death adjustment were overcounted due to reliance on data obtained before the sharp downturn, and I think many of them will disappear in a later revision.
And, btw, continuing claims are dropping mostly because people are falling off the rolls. There are now people dropping off the extended benefit rolls.
This article discussing BLS's mass layoffs report for May lends additional force to my skepticism:
The number of mass layoffs by U.S. employers rose last month to tie a record set in March, according to government data released on Tuesday that suggested the labor market has yet to stabilize.It would be virtually impossible for mass layoffs amounting to 312,000 jobs to constitute the vast majority of the jobs lost in May, and the official results of the establishment survey were that only 345,000 non-farm jobs were lost. No other piece of data matched that one. Not ADP, not the establishment survey, not the initial and not continuing claims. The number of mass layoffs reported for May was the highest since this data has been collected.
The Labor Department said the number of mass layoff actions -- defined as job cuts involving at least 50 people from a single employer -- increased to 2,933 in May from 2,712 in April, resulting in the loss of 312,880 jobs.
When times are tight, one of the main strategies is to allow attrition to work - it is certainly cheaper. There are also a huge number of total US workers in small companies that will never show up in a mass layoff report because there are too few total workers. I strongly suspect that the Births in the Birth/Death adjustment were overcounted due to reliance on data obtained before the sharp downturn, and I think many of them will disappear in a later revision.
And, btw, continuing claims are dropping mostly because people are falling off the rolls. There are now people dropping off the extended benefit rolls.
And Optimism Wears Thinner
In the US, both Redbook and ICSC Goldman retail reports are showing very poor June figures so far this month. These reports don't include WalMart, but both are currently predicting same-store sales dropping over 4% from May. Once again they are blaming weather.
European PMI came in weaker than expected at 44.4 versus the predicted 44.9. That is solidly in the contraction zone. French consumer spending fell in May, and German PMI fell to 43.4 from May's 44.
In the meantime, rising freight rates are causing problems around the world as current fuel prices dictate higher pricing in a world trade contraction.
As many observers are beginning to comment, the current contraction in world trade is on pace with that of the Great Depression. See, for example, Mauldin's current Outside the Box newsletter entitled A Tale of Two Depressions:
My opinion (and it's just my opinion) is that Europe should cut its energy tariffs heavily and that there should be a concerted international effort to properly regulate energy exchanges such as ICE. There is not much you can do about buying and holding of energy, nor is there anything you can do about dysfunctional but energy-rich countries such as Venezuela and Iran. Venezuela is about to lose more energy money due to the ongoing seizures of assets. We can safely say that such countries are not going to be expanding energy production because they are lethal to investors.
The US should sharply shift its energy policy. We need to drill and we need to develop our own oil shale resources. Nuclear energy should be a priority but is not, and in the near term we will be forced to expand coal-produced electricity.
Still, none of this is any good unless the emerging countries stop subsidizing energy and the western world stops the stupid subsidies for renewables that can never produce energy at competitive rates. Energy production is such a baseline input to the world economy that no other government policy can compensate for a bad international energy policy.
I am strongly in favor of renewables, but the reality is that heavily subsidizing renewables is draining economic resources at an ever-increasing rate at a time when we can least afford it. Why, for example, should Italian utilities be buying electricity from consumers at more than twice the rate at which they provide it? What type of collective pyschosis causes the CA legislature of a bankrupt state government to create an energy policy that will cost the state over 100 billion dollars over a decade and raise energy prices by 28%?
Economic efficiency MATTERS. Economic downturns end when economic efficiency rebounds to the point at which more people can buy more products and a growth pattern resumes. You have to let the world adapt to growth by letting it adapt rather than by adopting ridiculous policies to push on a string.
The end game for almost all of this - including bad tax policies in some European countries, overconsumption in the US, bizarre energy policies, government overexpansion, demographic changes and world trade imbalances - is now upon us. We won't defer the time of reckoning past this year, if I am reading the freight tea leaves correctly.
European PMI came in weaker than expected at 44.4 versus the predicted 44.9. That is solidly in the contraction zone. French consumer spending fell in May, and German PMI fell to 43.4 from May's 44.
A flash manufacturing PMI index rose to 40.5 from 39.6 in May. By contrast, the flash services PMI reading fell to 44.3 from 45.2 last month.Well, not if consumer spending continues to fall. Eastern Europe is, on the whole, still weakening. If the French aren't going to buy stuff, there doesn't seem to be all that much prospects of a true rebound. Italy is in very difficult straits, Spain is an ongoing bust (-7.4% in the first quarter), most of northern Europe continues a depression-like sag, and now European services for June showed a declining trend that is quite inconsistent with hopes for a second-half rebound:
PMI data on the manufacturing sector showing the ratio of new orders to stocks of finished goods dipped to 1.12 after rising to 1.18 in May.
"That ratio remains at a level that is consistent with a further recovery of output," Williamson said.
Figures published by Markit Economics Tuesday showed the euro zone's service-sector preliminary purchasing managers index, a closely watched gauge of private-sector activity, dipped to 44.5 in June from 44.8 in May, well below the 45.8 reading expected by economists.The result of these figures will be further retraction in manufacturing. Use Swiss watches as a guide:
"The failure of the service-sector PMIs to make further gains may lie in the fact that unemployment is beginning to pick up sharply in the euro zone," Matthew Sharratt, a European economist at Bank of America Merrill Lynch, said in a note.
Watch exports tumbled 27.6 percent in May, data from the Swiss Watch Federation showed on Tuesday, bringing the drop in demand in the first five months of the year to 25 percent.There's going to be a nasty knock-on effect through the next 8 months as rising unemployment erodes the effect of the lower interest rates and consumer subsidies in the developed economies.
...
Demand from Hong Kong, the biggest market for Swiss watches, fell by 26.2 percent, while exports to the United States tumbled 42.7 percent -- largely in line with the pace of decline in the previous month, the federation said.
Exports to France and Germany slipped 13.5 percent, while demand from Italy dropped 17.8 percent.
"Now, for the first time we saw that Western European countries had a double-digit decline," Weber said.
In the meantime, rising freight rates are causing problems around the world as current fuel prices dictate higher pricing in a world trade contraction.
As many observers are beginning to comment, the current contraction in world trade is on pace with that of the Great Depression. See, for example, Mauldin's current Outside the Box newsletter entitled A Tale of Two Depressions:
This week's Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today's downturn. They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.The charts are not very friendly. The bottom line is that only a very different response to these events will prevent a severe and extended global decline from forming. Velocity must be stimulated. One of the very big factors slowing velocity and likely to slow velocity much more in the near future are effective fuel costs.
This week's OTB will print long, but it is primarily charts.
My opinion (and it's just my opinion) is that Europe should cut its energy tariffs heavily and that there should be a concerted international effort to properly regulate energy exchanges such as ICE. There is not much you can do about buying and holding of energy, nor is there anything you can do about dysfunctional but energy-rich countries such as Venezuela and Iran. Venezuela is about to lose more energy money due to the ongoing seizures of assets. We can safely say that such countries are not going to be expanding energy production because they are lethal to investors.
The US should sharply shift its energy policy. We need to drill and we need to develop our own oil shale resources. Nuclear energy should be a priority but is not, and in the near term we will be forced to expand coal-produced electricity.
Still, none of this is any good unless the emerging countries stop subsidizing energy and the western world stops the stupid subsidies for renewables that can never produce energy at competitive rates. Energy production is such a baseline input to the world economy that no other government policy can compensate for a bad international energy policy.
I am strongly in favor of renewables, but the reality is that heavily subsidizing renewables is draining economic resources at an ever-increasing rate at a time when we can least afford it. Why, for example, should Italian utilities be buying electricity from consumers at more than twice the rate at which they provide it? What type of collective pyschosis causes the CA legislature of a bankrupt state government to create an energy policy that will cost the state over 100 billion dollars over a decade and raise energy prices by 28%?
Economic efficiency MATTERS. Economic downturns end when economic efficiency rebounds to the point at which more people can buy more products and a growth pattern resumes. You have to let the world adapt to growth by letting it adapt rather than by adopting ridiculous policies to push on a string.
The end game for almost all of this - including bad tax policies in some European countries, overconsumption in the US, bizarre energy policies, government overexpansion, demographic changes and world trade imbalances - is now upon us. We won't defer the time of reckoning past this year, if I am reading the freight tea leaves correctly.
Friday, June 19, 2009
Panicking
See the June RailTime report. Pdf.
This week's retail survey showed further marked declines. I'd say the drugstores are now getting hit as well.
It looks to me like all bets are off and crude is doomed to take one hell of a dive later this year. We are about two steps short of a depression.
This graph shows rail shipments of food products for 09 through May. It is the corollary to the horrible retail picture I have been seeing. Think about what this thing is saying. First, US population is probably at least stable even with an exodus of illegals. Second, food stamp allotments were increased, and over ten percent of the population is now receiving food stamps. Third, people who are very careful with their food budgets have seen about a ten percent drop in prices over the last year. Remember, this is a graph of volumes not value.
Therefore, this graph describes a massive and widely diffused shift in buying habits in grocery stores for food as well as probably poor food exports. The thing is, shipments had fallen so much in 08 that there shouldn't be much more room for declines.
Food products is a different category from grain, grain mill and farm ex grain.
Trucking continues its correlation with rail. In April, total volume of truck shipments was at 2001 levels:
